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DGX to Buy UMass Medical Lab (revised) - Analyst Blog

Leading diagnostic tester
Quest Diagnostics
(
DGX
) is keeping at par with its Merger and Acquisition (M&A)
strategy which the company expects to remain as its key driver of
growth. Recently, as part of this strategy, the company teamed up
with Central New England's largest health care system UMass
Memorial Health Care to purchase its clinical outreach
laboratory.

Although financial terms of this definitive purchase agreement
were not disclosed, Quest Diagnostics expects the transaction to
be completed in the next 3 months, subject to certain customary
regulatory clearance. The diagnostic testing stalwart expects the
incorporation of the clinical outreach laboratory to add 1% to
the company's consolidated revenues in the next fiscal with no
bottom-line impact. However, the company expects this transaction
to be accretive to its earnings per share (EPS) in fiscal
2014.

Quest Diagnostics expects this acquisition to establish a
long-term relationship between the two organizations. The plan
states that Quest Diagnostics' full-service laboratory in
Cambridge and its Athena Diagnostics specialty neurology testing
subsidiary in Worcester will be moved to a centrally located new
facility in Massachusetts.

The company expects this facility, after being fully
operational in next 18-24 months, to perform the testing
currently performed at UMass Memorial's Worcester-based outreach
laboratories as well as Quest Diagnostics' Cambridge and
Athena.

Per the plan, UMass Memorial will be taking a financial stake
in the new entity that would develop and operate a leading-edge
laboratory in Massachusetts in the future. Both the organizations
expect this advanced laboratory service to include a number of
benefits like higher quality service, expanded information
connectivity options, and reduced laboratory testing costs.

Quest Diagnostic believes that the impending acquisition is in
sync with its goal to create the company's planned 'lab of the
future' which will help it increase long-term growth
opportunities and increase shareholders' value.

Our View

We believe that the M&A decisions perfectly match the
company's current growth strategy. We expect capital deployment
to continue into the faster-growth esoteric markets. We assume
this recent endeavor could very well turn around the company's
fortune going ahead. However, more light on this matter is still
awaited.

Concerns linger about the soft industry trends due to a
decline in physician office visits, the ongoing margin trends and
the company's lower-than-expected fiscal 2012 guidance. However,
we hold a favorable view regarding the company's recently
announced (on October 11, 2012) major organizational
restructuring in order to increase operational efficiency and
restore growth.

According to the company, these structural changes will
eliminate 3 management layers representing 400-600 management
positions by the end of 2013, thereby making an annualized
savings of $65 million.

We anticipate that this organizational structure developed by
the company's new CEO, Steve Rusckowski will run successfully
adding further synergies to the company's ongoing $500 million
restructuring initiative associated with its Invigorate program.
We strongly expect these to improve margins in the upcoming
quarters. So, it may be a good bet for investors seeking growth
over the longer term.

We are impressed with Mr. Rusckowski's leadership style along
with his key areas of development including operation and
execution. In this regard, we are of the opinion that Mr.
Rusckowski should utilize his experience in operational
excellence over a long time.

However, the current price is not a good entry point for
short-term investors as the ongoing issues like weak volume
growth, flat pricing, low organic revenue and challenging
underlying market conditions may compel it to lose some market
capitalization in the near term. Moreover, the competitive
landscape remains tough with the presence of peers like
Laboratory Corporation of America Holdings
(
LH
). We currently have a 'Neutral' recommendation on Quest
Diagnostics.

(Note: We are revising this article to correct an error.
The original article, published yesterday, Oct. 22, 2012, is
not to be relied upon.)

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